Ream v. Frey
| Decision Date | 14 February 1997 |
| Docket Number | No. 96-1339,96-1339 |
| Citation | 107 F.3d 147 |
| Parties | , 20 Employee Benefits Cas. 2657, Pens. Plan Guide (CCH) P 23931S Jeffrey REAM, v. Jeffrey E. FREY; Fulton Bank; Laurie L. Frey; Fulton Bank, Appellant. |
| Court | U.S. Court of Appeals — Third Circuit |
Gerald S. Berkowitz (argued), Malvern, PA , for Appellee.
Michael A. Moore (argued) Barley, Snyder, Senft & Cohen, Lancaster, PA, for Appellant.
Before: SLOVITER, Chief Judge, and GREENBERG and SCIRICA, Circuit Judges.
Fulton Bank (the "Bank") appeals from a grant of summary judgment by the district court in favor of appellee Jeffrey Ream on April 1, 1996. Ream brought suit against the Bank alleging that it breached its fiduciary duty by resigning as plan trustee and transferring to Jeffrey Frey, the plan administrator and the principal in Ream's employer, the assets of an Employee Retirement Income Security Act of 1974 ("ERISA") pension fund plan which Frey subsequently converted and used for his own purposes. This appeal raises questions concerning the scope of the fiduciary duties of a plan trustee under ERISA when the trustee is resigning. We have jurisdiction pursuant to 28 U.S.C. § 1291 as this appeal is from a final order of the United States District Court for the Eastern District of Pennsylvania. This case arises under ERISA, and thus the district court had subject matter jurisdiction pursuant to 28 U.S.C. § 1331 and ERISA § 502(e)(1) and (f), 29 U.S.C. § 1132(e)(1) and (f).
The material facts are not in dispute. See Supplemental Appendix, Stipulation of Uncontested Facts ("Stipulated Facts"). Ream was an employee of JLC Construction Co., Inc. ("Company"). Stipulated Fact p 3. Effective January 1, 1989, the Company established the JLC Construction Company Profit Sharing 401(k) Plan (the "plan") under 26 U.S.C. § 401 et seq. The Company first established the plan pursuant to written plan documents consisting of a Standardized Adoption Agreement and Basic Plan Document. 1 Stipulated Fact p 4. Ream was a participant in the plan with a 100% vested account. Stipulated Fact p 3. Fulton Bank, the designated plan trustee, deposited all of the plan's funds in a trust account it maintained at the Bank.
In addition to designating Fulton Bank as plan trustee, the Basic Plan Document designated the Company as the plan administrator, and the Adoption Agreement designated Frey, the sole shareholder of the Company, as the plan administrator on behalf of the Company. App. at 62-63. The Plan Document also specified the responsibilities of the administrator and the trustee. The administrator had the duties of establishing a funding policy consistent with ERISA, determining and making contributions to the plan, communicating with plan beneficiaries and participants, and complying with ERISA and other governmental reporting requirements. Basic Plan Document § 11.1. The trustee's duties were limited to receiving contributions, investing the contributions once received, and making distributions in accordance with instructions from the Company. Basic Plan Document § 11.2. However, the Basic Plan Document placed the responsibility solely on the Company to collect and remit the contributions to the trustee. Basic Plan Document § 3.3. Further, the plan specifically allocated to the Company, as the plan administrator, all other administrative duties required by either applicable law or by the plan.
The Plan Document specifically limited the liability of the trustee. Section 11.4 of the Plan Document, entitled "Division of Duties and Indemnification," exempted the trustee from any guarantee "against investment loss or depreciation in asset value, or [from any] guarantee [about] the adequacy of the Fund to meet and discharge all or any liabilities of the Plan." However, the trustee could be liable for its actions "to the extent it is judicially determined that the Trustee/Custodian has failed to exercise the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character with like aims." Furthermore, Section 11.4 stated that
During Fulton Bank's tenure as trustee, the Company sometimes would delay its remittance of employer contributions for several months. Fulton Bank then would call or write to the Company to expedite remittance of the contributions. The Company caused the Bank additional difficulties because it was uncooperative in providing the Bank with information regarding the plan's administration. Stipulated Fact p 17. By the spring of 1993, the Company had failed to provide Fulton Bank with employer matching contributions for 1992 and 1993. The Bank sent the Company letters "admonishing" it to pay over the monies and warning that it would resign as trustee if salary deferral remittances continued to be delinquent. Finally, the Bank forwarded a letter to Frey stating that it was resigning as trustee pursuant to its prior correspondence and pursuant to Article 15.6 of the Basic Plan Document. See app. at 284, Exhibit 6, app. at 286, Exhibit 7. Article 15.6 provides that the trustee may resign by written notice to the Company followed by delivery of the fund assets to the Company's chosen successor trustee. If the Company failed to appoint a successor, the Bank could deliver the assets to the Company which then would be deemed the successor trustee.
The Bank then attempted to contact the Company to persuade it to appoint a successor trustee for the plan assets, but Frey never responded to the Bank's repeated requests for an appointment. Stipulated Fact p 23. Thus, a successor trustee never was appointed. Ultimately, the Bank sent a letter to Frey stating that unless Frey notified Fulton Bank of the successor within 15 days, the Bank would issue a check to Frey and designate him as the successor trustee in accordance with the plan. App. at 291. Frey did not respond, and Fulton Bank sent him a letter on October 5, 1993, informing him of the status of the plan and forwarding the plan assets consisting of a check in the amount of $53,008.15 and three promissory notes. App. at 293. The Bank appointed Frey as the successor trustee of the plan. The check was payable to "Jeffrey Frey, successor Trustee for the JLC Construction Co., Inc. Profit Sharing 401(k) plan." The check was endorsed "Jeffrey Frey" and honored by the Bank. Frey subsequently converted all of the assets of the plan to his own use.
Ream's account balance in the plan at the end of 1992 was $13,829.92, and he continued to make weekly contributions to the plan through 1993 totaling $1,180.80. As we indicated, the Bank sent Frey a check for $53,008.15, an amount exceeding Ream's balance. At oral argument counsel advised us that there were ten to fifteen other beneficiaries of the plan, but except for Ream no beneficiary has brought any action against the Bank.
On November 3, 1994, the Company filed for bankruptcy under Chapter 7 of the Bankruptcy Code in the Eastern District of Pennsylvania and shortly thereafter Ream demanded payment of his plan assets from Frey. Until this time, Ream was not aware that Fulton Bank had transferred the plan assets to Frey, and neither the Bank nor the Company ever had notified Ream of the delays in payments to the plan, of Fulton Bank's intention to resign, or of Fulton Bank's final resignation. Ream's wife contacted Fulton Bank after the Company filed for bankruptcy. In response to her inquiry as to why the trustee had not notified the plan beneficiaries as to what had happened, the Bank responded that "while we are not having cooperation from the Company, that did not mean bad things were happening...." App. at 347.
By letter dated January 4, 1995, Frey acknowledged that he owed Ream $16,206.00 pursuant to the plan and proposed paying that money in installments. App. at 346; Stipulated Fact p 34. Though Ream initially rejected this offer, instead instituting suit against both Frey and the Bank for breach of fiduciary duty, Ream later agreed to settle with Frey for $21,556.93. However, Frey paid only $18,556.93 to Ream before disappearing. It appears that the settlement figure exceeded the amount due Ream under the plan because Frey owed him additional money on other items. App. at 306.
This appeal concerns the $3,000.00 which Frey did not pay to Ream plus interest owed to Ream as well as the substantial attorney's fees that Ream has incurred. Frey has been dismissed from the suit as he is no longer within the jurisdiction and the parties do not know his whereabouts. Stipulated Fact p 36.
On cross-motions for summary judgment, the district court held that Ream could recover damages on his own behalf for a breach of fiduciary duty under ERISA, that Fulton Bank violated its fiduciary duty by not acting as a prudent person when it forwarded the plan assets to Frey who had a history of failing in his fiduciary duties to the plan, and that Fulton Bank was liable for Frey's subsequent breach of fiduciary duties because its own failure to comply with the required standard of care enabled Frey, a co-fiduciary, to convert the assets of the plan for his own use. 2 The court, however, dismissed Ream's common law tort claims as preempted by ERISA--a holding he does not dispute on this appeal. Although it had reserved the issue of damages for trial, based on the parties' stipulated agreement the court entered a judgment against the Bank on April 15, 1996,...
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